Question 1

All of the following are regulatory commissions dealing with industrial regulation (as distinct from social regulation) except the
A)Food and Drug Administration.
B)Federal Energy Regulatory Commission.
C)Federal Communications Commission.
D)50 state public utility commissions.

Accepted Answer

The Food and Drug Administration is a regulatory commission dealing with social regulation, specifically regulating the safety and efficacy of food, drugs, and medical devices. The other three options listed deal with industrial regulation, such as regulating energy markets and communications industries.

Question 2

Critics of the regulation of natural monopolies contend that
A)regulation increases the incentive of firms to lower costs.
B)regulated firms may use creative accounting to reduce costs, prices, and profits.
C)when rates of return are based on the value of real capital, an uneconomic substitution of labor for capital may occur.
D)the industry may "capture" or control the regulatory commission.

Accepted Answer

Critics of natural monopoly regulation argue that the industry may "capture" or control the regulatory commission. This means that the regulated firms may have too much influence over the rules and regulations that the regulatory commission creates and enforces. As a result, the regulation may become less effective in protecting consumers and promoting competition.

Question 3

Using antitrust law to split up an unregulated natural monopoly into several competing firms
A)would reduce product price.
B)would increase product price.
C)might either increase product price or reduce product price.
D)would reduce average total cost.

Accepted Answer

The outcome of using antitrust law to split up a natural monopoly and creating competition cannot be predicted with certainty. It could lead to reduced product prices if the new firms engage in aggressive pricing to capture market share. On the other hand, it could also lead to increased prices if the new firms incur higher costs due to duplication of infrastructure and operations. Therefore, it is possible for the outcome to either increase or decrease product prices.

Question 4

The view that the antitrust laws should be enforced relatively leniently because of the tendency for monopoly power to erode over time is known as the
A)structuralist view of antitrust.
B)behavioralist view of antitrust.
C)laissez-faire perspective on antitrust.
D)active antitrust perspective.

Accepted Answer

The laissez-faire perspective on antitrust holds that markets are self-regulating and that government intervention in the economy should be limited. This view suggests that the antitrust laws should be enforced relatively leniently because monopolies tend to erode over time without government intervention.

Question 5

Suppose that two firms in an industry with a Herfindahl index of 5,000 announce a merger.The U.S.Justice Department concludes the merger will boost the index to 5,500.The antitrust authorities will most likely
A)ignore this merger because of the relatively small increase in the Herfindahl index.
B)allow the merger but watch the new firm carefully for future violations of the antitrust laws.
C)allow the merger if foreign entry to the industry is possible.
D)prevent the merger, contending that it violates the Clayton Act.

Accepted Answer

The increase in the Herfindahl index from 5,000 to 5,500 is considerable, indicating that the merger will substantially increase market concentration. As a result, the antitrust authorities are likely to prevent the merger under the Clayton Act, which prohibits mergers that may result in a substantial lessening of competition.

Question 6

Economists who adhere to the laissez-faire antitrust perspective
A)view competition as a long-run dynamic process in which firms battle for dominance of markets but rarely can sustain such dominance once it is achieved.
B)believe the antitrust laws are as important today as they were when they were passed in the early 1900s.
C)say that an industry's structure, which is based on economies of scale, usually predicts the behavior of the industry firms.
D)contend that large, dominant firms should be broken into smaller competitive firms and then government should stand back and let competition prevail.

Accepted Answer

Economists who adhere to the laissez-faire antitrust perspective view competition as a long-term dynamic process in which firms battle for dominance of markets but rarely can sustain such dominance once it is achieved. They do not believe that antitrust laws are as important today as they were when they were passed in the early 1900s. They also do not think that large, dominant firms should be broken into smaller competitive firms, but rather that competition should be allowed to prevail naturally. They may take into consideration the industry's structure, but believe that the behavior of the firms within the industry is driven more by the interaction of market forces than by structural factors.

Question 7

Critics of industrial regulation say that such regulation
A)contributes to X-inefficiency.
B)benefits small firms at the expense of large firms.
C)creates insurmountable principal-agent problems.
D)suffers from the free-rider problem.

Accepted Answer

Critics of industrial regulation argue that regulations lead to excessive bureaucracy and inefficiency in the economy, which results in X-inefficiency. X-inefficiency occurs when a firm operates at a higher cost than necessary or produces at a lower level than it is capable of. Therefore, industrial regulation can hinder market performance by reducing competition, which in turn can lead to higher prices, reduced innovation, and reduced economic growth.

Question 8

Which of the following is characteristic of a regulated natural monopoly?
A)extensive economies of scale
B)the wasteful duplication of capital facilities in the event of competition
C)the provision of an essential service
D)all of these

Accepted Answer

All of the given options are characteristics of a regulated natural monopoly. Regulated natural monopolies have extensive economies of scale, which means that the average cost of production decreases as the output increases. In such cases, competition can lead to the duplication of capital facilities, resulting in wastage of resources. These firms provide essential services that are critical to the public, such as water supply, electricity, and telecommunications. As a result, they are regulated by the government to ensure fair pricing and quality of service.

Question 9

The main purpose of industrial regulation is to
A)lower price to marginal cost.
B)lower price to average total cost such that the firm earns a fair return.
C)break monopolies into competing firms.
D)reduce X-inefficiency.

Accepted Answer

The main purpose of industrial regulation is to ensure that firms earn a fair return on their investment, while also protecting consumers from high prices and poor-quality products or services. This is achieved by setting price ceilings or floors that ensure that firms price their products in line with their costs, while also addressing issues of market power and competition. Breaking monopolies into competing firms is one way to achieve this goal, but it is not the primary purpose of industrial regulation. Similarly, reducing X-inefficiency may be a secondary goal of regulation, but it is not the main objective. Lowering prices to marginal costs is not a realistic goal, as firms need to make a profit to stay in business.

Question 10

Where there is natural monopoly, government is most likely to implement
A)social regulation.
B)antitrust policy.
C)industrial regulation.
D)an externality containment policy.

Accepted Answer

Natural monopolies can arise due to high fixed costs of entry and economies of scale, which prevent competition from emerging. In such cases, the most likely policy response from the government would be industrial regulation, which involves government regulation of price, entry and exit, and service quality to ensure that consumers are not exploited by the natural monopoly.

Question 11

A firm is likely to be a natural monopoly
A)when the demand for its product or service is inelastic.
B)if it is producing an inferior good.
C)if economies of scale are experienced over the full range of output.
D)because government grants it an exclusive franchise.

Accepted Answer

Natural monopolies occur when economies of scale are experienced over the full range of output. This means that the firm's average total cost decreases as it produces more and more output. As a result, a single firm can produce at a lower cost than any potential competitor, leading to a situation where it becomes the only producer in the market. Inelastic demand (A) and inferior goods (B) do not necessarily lead to natural monopolies. The government's grant of an exclusive franchise (D) can create a monopoly, but this is not necessarily a natural monopoly.

Question 12

Critics of industrial regulation say that such regulation
A)benefits small firms at the expense of large firms.
B)perpetuates monopoly long after new technology has eroded natural monopoly.
C)creates insurmountable principal-agent problems.
D)has resulted mainly from the paradox of voting.

Accepted Answer

Critics of industrial regulation argue that it perpetuates monopoly even after technology has eroded natural monopoly, as regulators are often slow to adapt to new market conditions. This can hinder competition and efficiency in the market. The other answer choices do not accurately reflect the criticisms of industrial regulation.

Question 13

Which one of the following is concerned with industrial regulation, as distinct from social regulation?
A)Occupational Safety and Health Administration
B)Consumer Products Safety Commission
C)Federal Communications Commission
D)Environmental Protection Agency

Accepted Answer

The Federal Communications Commission (FCC) is concerned with industrial regulation, specifically in regards to regulating communication, broadcasting, and spectrum allocation. Occupational Safety and Health Administration (OSHA) and Consumer Products Safety Commission (CPSC) both fall under social regulation, while Environmental Protection Agency (EPA) covers both industrial and social regulation.

Question 14

The legal cartel theory of regulation argues that
A)regulation encourages firms to inflate their production costs.
B)firms in certain industries want to be regulated rather than face the rigors of competition.
C)social regulation has been carried beyond the point at which marginal benefits and marginal costs are equal.
D)the government is the logical agency to protect consumers from natural monopolies.

Accepted Answer

The legal cartel theory of regulation argues that firms in certain industries want to be regulated because it allows them to limit competition and maintain higher prices, essentially creating a legalized cartel. This theory suggests that rather than facing the rigors of competition, these firms prefer to operate in an environment where they can control the market through regulation.

Question 15

A major criticism of industrial regulation is that
A)it has been applied to virtually all major U.S.corporations in the post-Second World War period.
B)marginal cost pricing has created an underallocation of resources.
C)by allowing a fair return price, it gives natural monopolists little incentive to contain costs.
D)regulatory commissions have frequently caused natural monopolies to go bankrupt.

Accepted Answer

One major criticism of industrial regulation is that natural monopolies are given little incentive to contain costs since they are allowed a fair return price. This can lead to inefficiency and higher prices for consumers.

Question 16

The view that the antitrust laws need to be strongly enforced to prevent illegal business behaviors, monopolization of markets, and allocative inefficiency is known as the
A)structuralist view of antitrust.
B)behavioralist view of antitrust.
C)laissez-faire perspective on antitrust.
D)active antitrust perspective.

Accepted Answer

The answer of The view that the antitrust laws need...

Question 17

The public interest theory of industrial regulation contends that
A)while industrial regulation is sound in theory, bureaucrats allow monopolists to obtain excessive profits.
B)regulated monopolies are tantamount to legal cartels.
C)the objective of regulation is to protect the public from the market power inherent in natural monopolies.
D)firms in some industries want to be regulated.

Accepted Answer

The public interest theory of industrial regulation posits that regulation is necessary in industries characterized by natural monopolies, and is designed to protect consumers from the market power these monopolies have. This theory asserts that regulation should balance the interests of producers with those of customers, and should prevent monopoly profits from being excessive.

Question 18

A market in which the entire demand for a good or service can be satisfied at the least cost by a single firm is a
A)horizontal market.
B)natural monopoly.
C)contestable market.
D)perfect market.

Accepted Answer

A natural monopoly is a market in which the entire demand for a good or service can be satisfied at the least cost by a single firm. This is typically due to high fixed costs and economies of scale, making it difficult for new firms to enter and compete with the established firm. A horizontal market refers to a market in which products are similar and compete with each other, a contestable market is one in which potential entrants could compete with existing firms if they chose to, and a perfect market is one in which there are many buyers and sellers, perfect information, and no barriers to entry or exit.

Question 19

Suppose that two firms in an industry that has a Herfindahl index of 1,000 announce a merger.The U.S.Justice Department concludes the merger will boost the index to 1,050.The antitrust authorities will most likely
A)ignore this merger because of the relatively small size of, and increase in, the Herfindahl index.
B)prevent the merger, contending that it violates the Clayton Act.
C)allow the merger if foreign entry to the industry is possible.
D)allow the merger but watch the new firm carefully for future violations of the antitrust laws.

Accepted Answer

The answer of Suppose that two firms in an industry...

Question 20

Suppose the transportation industry has been regulated for many years.Government now proposes to deregulate the industry, only to find that firms in the industry oppose this action.This is consistent with the
A)public interest theory of regulation.
B)theory of natural monopolies.
C)legal cartel theory of regulation.
D)Alcoa and U.S.Steel court decisions.

Accepted Answer

The legal cartel theory of regulation states that industries can create a regulated environment that acts like a cartel, allowing firms to restrict competition and increase profits. In this scenario, the firms in the transportation industry may oppose deregulation because they benefit from the current regulatory environment, which limits competition and allows them to set higher prices.

Quiz 21: Antitrust Policy and Regulation

All of the following are regulatory commissions dealing with industrial regulation (as distinct from social regulation) except the

Critics of the regulation of natural monopolies contend that

Using antitrust law to split up an unregulated natural monopoly into several competing firms

The view that the antitrust laws should be enforced relatively leniently because of the tendency for monopoly power to erode over time is known as the

Suppose that two firms in an industry with a Herfindahl index of 5,000 announce a merger.The U.S.Justice Department concludes the merger will boost the index to 5,500.The antitrust authorities will most likely

Economists who adhere to the laissez-faire antitrust perspective

Critics of industrial regulation say that such regulation

Which of the following is characteristic of a regulated natural monopoly?

The main purpose of industrial regulation is to

Where there is natural monopoly, government is most likely to implement

A firm is likely to be a natural monopoly

Critics of industrial regulation say that such regulation

Which one of the following is concerned with industrial regulation, as distinct from social regulation?

The legal cartel theory of regulation argues that

A major criticism of industrial regulation is that

The view that the antitrust laws need to be strongly enforced to prevent illegal business behaviors, monopolization of markets, and allocative inefficiency is known as the

The public interest theory of industrial regulation contends that

A market in which the entire demand for a good or service can be satisfied at the least cost by a single firm is a

Suppose that two firms in an industry that has a Herfindahl index of 1,000 announce a merger.The U.S.Justice Department concludes the merger will boost the index to 1,050.The antitrust authorities will most likely

Suppose the transportation industry has been regulated for many years.Government now proposes to deregulate the industry, only to find that firms in the industry oppose this action.This is consistent with the